US-China trade war: Beijing wants India on its side but accepting 'friendship' will cause New Delhi more harm than good

It is interesting to see China trying to make common cause with India on multilateralism and global trade and attempting to sweet talk New Delhi into forming some sort of a coalition against the US. India should be wary of Beijing’s advances. It does not make strategic, economic or geopolitical sense for India to coalesce with an adversary who cannot be trusted and provoke a strategic partner with whom a relationship based on shared interests and values is slowly maturing.

In fact, China is the driver of India-US strategic embrace. If Washington and New Delhi have sought to find common ground between themselves in engaging, cooperating, competing and even sparring with Beijing, it is largely owing to the nature of China’s rise. Under the leadership of Xi Jinping, China has sought to remodel the power balance in Asia and appears to be in a hurry to assume the role of a countervailing force to the US.

And unlike Russia which restricts itself to the role of a disruptor, China is playing the long game, investing its single-minded attention and resources in providing an alternative political and development model to substitute the liberal democratic order. In its attempts at doing so, the one condition that China needs is stability in global trading and financial system — a condition that is at peril due to a maverick US president and his disruptive influence. In less than two years, Donald Trump has ripped apart the world economic order, raised walls around American border and economy, redrawn alliances and withdrawn from multilateralism and globalism.

He has also gone after China, driven by a deep conviction that Beijing cheats in trade and its extraordinary growth has occurred at American expense. The Trump administration feels that Beijing’s prosperity and vaulting ambition arise from its ability to manipulate a system underwritten, maintained and bankrolled by the US, and it wants to put a stop to the free lunch. Not the least because Beijing has taken aim at American economic, military and even technological dominance.

While answering questions from US senators on the Homeland Security Committee on China’s attempts to influence American public opinion ahead of November mid-term elections, US security officials identified China as “greatest long-term counterintelligence threat to the US”. FBI director Christopher Wray was quoted, as saying by news agency Reuters: “China in many ways represents the broadest, most complicated, most long-term counterintelligence threat we face… Russia is in many ways fighting to stay relevant after the fall of the Soviet Union. They’re fighting today’s fight. China’s is fighting tomorrow’s fight."

To tackle what he considers as Beijing’s unfair trade practices and manipulative industrial policies — and to ensure “fair and reciprocal trade” — Trump has taken a slew of measures against China and has promised to escalate the battle if China retaliates or even if it stays oblivious.

Last month, Trump slapped tariffs on nearly $200 billion worth of Chinese imports, bringing the total amount of goods under new taxes to $250 billion. The tariffs carry an initial rate of 10 percent and will be increased to 25 percent by 1 January, 2019 if Beijing refuses to offer trade concessions. China retaliated by levying taxes on $50 billion of US imports, following which Trump threatened to slap tariffs on Chinese goods worth $267 billion more.

Simultaneously, Steven Mnuchin, the US treasury secretary, has warned China against manipulating its currency by letting it slide and told London-based Financial Times in an interview that “as we look at trade issues there is no question that we want to make sure China is not doing competitive devaluations.” Renminbi, the Chinese currency, has witnessed a 10.9 percent fall Rmb6.9213 per USD from its strongest point this year in late March.

In addition, the US federal government has decided to tighten foreign investment rules to prevent Chinese investors from buying their way into 27 “sensitive sectors” including “telecommunications and semiconductors as well as aircraft manufacturing, including engines and engine parts, aluminium production, computer storage devices, guided missiles and other military equipment”. The US suspects that Chinese government-backed companies are trying to steal intellectual property, sensitive data and trade secrets by investing in critical technologies.

In March last year, a white paper commissioned by the US Department of Defense found that Chinese companies, backed by the government, are strategically investing in American start-ups “specializing in critical technologies like artificial intelligence and robots to advance China’s military capacity as well as its economy.”

These are not unfounded worries. China plays dirty to win, and its quest for dominance in areas where the US enjoys traditional superiority has spurred it to take extraordinary actions, such as spying on around 30 major US companies including Amazon and Apple by hacking into servers and technology supply chain using sophisticated stealth hardware implants, as Bloomberg had recently reported.

This tightening of rules, therefore, has China worried. Even as it has tried to match the US in retaliatory measures, the resultant trade war has weakened its economy and slowed its growth. China’s one-party autocracy depends on economic growth for political legitimacy. When that slows, the Communist Party of China’s grip on power may loosen.

Its economy is showing signs of strain, raising doubts over the sustainability of its meteoric rise. China’s stock market has taken a beating despite quantitative easing by its central bank, the renminbi is wobbling, and its foreign exchange reserves have dropped sharply in September, by $22.7bn to $3.1tn, more than the market had expected, according to a report in Financial Times.

Recent indicators reflect a slowdown in key sectors such as retail, aviation, software, real estate and construction. Manufacturing index has slumped to its weakest since February. While some of the pain could be attributed to the flight of capital from emerging markets due to a booming US economy and a strong dollar, there is no doubt that the trade war has affected China more than the US.

As a report in Forbes points out, “Chinese GDP slowed to 6.7 percent in the second quarter compared with the first quarter and some economists believe it could go as low as 5 percent once the full effects” kick in.

Part of the reason why China is losing the trade war is obvious. As the trading partner that enjoys surplus with most nations including the US, a disruption of the global economic system and rise in protectionist measures will affect it more. This is also the chief reason why China is interested in maintaining the status quo. China’s entry into the WTO-led world trading system was accompanied by an expectation that market forces will lead to an opening up of its market and society as the country becomes entrenched in the global financial system.

China has not only belied that expectation, but it has also profited from the stability and manipulated the system to its advantage, using the strength and size of its domestic market as leverage to gain an unfair advantage over competitors. China has simultaneously exploited and underscored the vulnerability in the capitalist system where market forces can bend and distort the rules-based order.

As Fareed Zakaria points out in Washington Post, China has “managed to block or curb the world’s most advanced and successful technology companies, from Google to Facebook to Amazon. Foreign banks often have to operate with local partners who add zero value — essentially a tax on foreign companies. Foreign manufacturers are forced to share their technology with local partners who then systematically reverse engineer some of the same products and compete against their partners.”

Now that Trump is upending the stability of this system, China’s vulnerability is exposed. It has been hampered even more by the fact that its economy, powered chiefly by state-owned juggernauts, are nowhere as efficient as the US economy.

As Minxin Pei writes in Project Syndicate, “The main reason for this is the enduring clout of China’s state-owned enterprises (SOEs), which consume half of the country’s total bank credit, but contribute only 20% of value-added and employment.” According to Pei, the SOEs serve as conduits of power and play a vital role in sustaining CPC’s hold over polity, therefore, “dismantling these bloated and inefficient firms would thus amount to political suicide.”

It is evident that China is in a spot, and for all its economic progress and military power, it has no allies to turn to in times of need. It's wooing of India should be seen from this perspective, and New Delhi should be under no illusion that the Middle Kingdom’s ‘kinship’ is borne out of a genuine goodwill towards India.

Counselor Ji Rong, the spokesperson of the Chinese Embassy in India, was correct in his assessment on Wednesday that “as the two largest developing countries and major emerging markets, China and India are both in the vital stage of deepening reform and developing economy, and both need stable external environment.” But it doesn’t follow that India would benefit by heightening its trading activities with China, especially as the bilateral trade deficit shows no signs of abating.

As an editorial in the Times of India points out, “China has denied market access to India even as China gets disproportionate access to Indian markets. For example, even as India plays a major role in the global pharmaceutical market, only 1% of India’s exports go to China.”

At the WTO this year, India had warned China “that its $63 billion trade deficit with the country was unsustainable and mere lip-service to bridge the gap was not enough”. India’s farm exports continue to face Chinese regulatory hurdles and in the area of pharmaceuticals, Indian generic producers are unable to access the Chinese market “due to complex and onerous regulatory requirements,” according to a report in the Hindu Business Line.

It is ironical to hear Chinese diplomat Ji say that “facing unilateralism and bullying activities, China and India have more reasons to join efforts to build a more just and reasonable international order” when one considers the way China has undermined the global trading system and now wants to lock down the anomaly.

Finally, it makes little strategic sense for India to align with China when it carries out actions inimical to Indian interests from supporting Pakistan’s terror policy, undermining Indian sovereignty in Kashmir and putting a spanner in India’s efforts to gain membership in the Nuclear Suppliers Group or listing of Masood Azhar in the UNSC 1267 Committee. It would make sense for India to respond cautiously to China’s outreach. The Middle Kingdom can be nobody’s friend or ally.

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